Disney stock (DIS) has recently reversed its gains in the year’s first half, reflecting ongoing challenges. Despite some improvements in profitability, the company’s recent quarterly reports highlight lasting issues. The entertainment giant’s legacy TV channels are struggling while the Direct-to-Consumer division grapples with intense competition, limiting its growth potential. I believe these challenges will likely persist, extending the stock’s underperformance. Hence, I remain neutral on Disney stock.
Legacy TV Decline Continues
To understand Disney’s ongoing struggles, first, we need to examine the company’s entertainment segment, which constitutes its largest revenue chunk. The results were underwhelming. Despite a modest 4% increase in segment revenues to $10.58 billion, the underlying challenges in the legacy TV business were evident. Hence, my neutral position.
Linear Networks, which includes the company’s aging TV business, saw a 7% revenue decline to $2.66 billion. This decline reflected continued challenges in domestic and international markets, primarily driven by lower advertising revenues due to declining viewership and the non-renewal of carriage agreements for specific networks.
Also, Linear Networks’ domestic operations, which constitute the bulk of this category, saw minimal relief as higher advertising rates were offset by a significant decrease in impressions. This eroding trend has endured for several quarters now, clearly highlighting the diminishing appeal of Disney Channel, ESPN, and National Geographic, among other channels.
DTC Shows Improvement, but Challenges Remain
On a more positive note, Disney’s Direct-to-Consumer (DTC) business showed signs of recovery, but stiff competition continues to present a massive long-term challenge. Specifically, DTC revenues increased by 15% to $5.8 billion, driven by higher subscription fees and a slight improvement in subscriber numbers.
Still, the business remains under pressure, with Disney+ Core subscribers only growing by 1% sequentially to 118.3 million. Further, the profitability of the DTC segment continues to be a major concern. While the operating loss in DTC narrowed significantly from $505 million in Q3 2023 to just $19 million this quarter, the business has yet to reach sustainable profitability.
Disney’s management expressed optimism about achieving profitability in Q4, but the fierce competition from Netflix (NFLX), Amazon Prime (AMZN), and others makes this an uphill battle. This is especially true considering that Netflix, for instance, is even posting accelerating growth, with its paid subscribers rising 16.5% to nearly 278 million.
In contrast, with less than half the number of subscribers, Disney finds it challenging to keep pace. This disparity suggests that the company may need to ramp up its promotional activities and content creation investment to remain competitive, potentially impacting its plans to turn this segment profitable.
Parks & Experiences Segment
As stated above, I hold a neutral sentiment over DIS stock. The reason is that even DIS’s traditionally strong performer doesn’t set the world alight, all while signs of a slowdown emerge. Disney’s Parks & Experiences segment continued to post decent numbers in fiscal Q3. Still, signs of significant slowing growth are evident. Revenues rose by just 2% to $8.39 billion, notably weaker than last year’s revenue growth of 13%. Further, it’s worth noting that the segment’s operating income dipped by 3% to $2.22 billion, mainly due to rising costs from inflation and new guest offerings.
In my view, these numbers show that while guest spending per capita remains robust – especially at the cruise line and theme parks – there are signs of easing demand, particularly in international markets like Disneyland, Paris, and China. With flat attendance figures and expectations of a mid-single-digit decline in operating income for Q4, there are growing questions about how much longer Disney can rely on price hikes to drive revenue without hitting a ceiling.
Is DIS Stock a Buy, According to Analysts?
Wall Street’s view on DIS stock seems more optimistic than mine, as Disney has a Strong Buy consensus rating based on 19 Buys and four Holds assigned in the past three months. At $118.53, the average DIS stock price target suggests a 31.15% upside potential.
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Conclusion: A Cautious but Necessary Outlook
Overall, Disney’s Q3 results highlight some positive trends at first glance, such as the narrowing of DTC losses and steady performance in the Parks & Experiences segment. However, the broader outlook warrants caution and explains why DIS stock surrendered all the gains achieved in the year’s first half.
The continuous erosion in Linear Networks, the enduring struggle to achieve DTC profitability, and the potential softening of park demand suggest that Disney still has significant challenges ahead. Combined with the current competitive landscape, it’s evident that the path forward will be anything but smooth. Therefore, I expect investor interest in Disney’s stock to remain subdued, regardless of its valuation. Therefore, I am neutral on DIS stock.
